…a purely capitalistic society, without any type of regulation at all, you will get one monopoly that will eat all of the smaller fish and own everything, and then you’ll have zero capitalism…[222]
Serj Tankian
The unified theory of macroeconomic failure considers monopolies and poor quality information as negative externalities requiring government intervention and correction. This chapter discusses the negative externalities that cause market failures in the private sector. In the first part, it considers two negative market externalities: monopolies and monopsonies and chronic underconsumption, a negative externality that is a consequence of monopsony. The rest of the chapter focuses on the impact of other negative externalities on economic efficiency, mostly the result of moral failures causing poor quality of information. The next chapter looks at the economic failure of public policy, typically traceable to the failure of the political marketplace. In addition, efficient markets require rational and efficient financing and taxation, which Part V explores.
Let us begin by clarifying that the term ‘monopolies’ here and subsequently refers to all forms of restriction of trade including monopoly, duopoly, oligopoly, cartels, and trusts on the demand side and monopsony on the supply side.
Adam Smith, in his seminal Wealth of Nations, recognized that self-interest, free markets, and competition would lower prices and benefit society. However, he also anticipated that businesses would prefer monopolies to maximize prices and profits and that they would conspire to sway politicians and legislation accordingly. His analysis was on the mark.
The quotation at the beginning of this chapter provides interesting insight into monopoly; it is all the more remarkable because its author is a musician, not a professional economist. It hints at a theoretical similarity between parasitic capitalism and communism because the absence of regulation fosters monopoly with a theoretical limit of a single monopolist encompassing the whole economy and, therefore, the state—precisely the communist model. Thus, at some abstract level, both systems have the potential to arrive at the same ultimate destination despite starting from opposite directions. Incidentally, this also provides a conceptual explanation of why the capitalist system becomes less efficient as the share of monopoly elements in GDP increases because its similarity to the inefficient nonmarket Marxist model increases.
Parasitic capitalism seeks to earn above average, parasitic, profit by restricting competition, through monopolies on the sales side and monopsonies on the purchases side of the market equation. Monopolies, our focus in this section, maximize their profit by restricting supply and raising prices. Lack of competition permits the gouging of consumers and the government, artificially their costs. The difference between the price charged by a monopolist and a normal competitive price represents a negative externality caused by this market failure, which is typically irreparable without government intervention. Government intervention could take the form of increasing competition by breaking up monopolies, duopolies, oligopolies and cartels. In the case of natural monopolies such as utilities, railways, ports, airports, stock exchanges, central banks, and the like, increasing competition is not an economically viable option; in such cases government intervention could take the form of price regulation or outright nationalization.
Thus, the United States Congress passed three landmark antitrust laws to promote fair competition and stop the gouging of consumers by regulating markets and breaking up and preventing monopolies. These laws were the Sherman Act in 1890, the Clayton Act in 1914, and the Federal Trade Commission Act in 1914. Congress recognized the economic inefficiency of unregulated markets and these acts were a capitalist solution to a capitalist problem.
However, since the 1980s the counter-revolution has been dismantling the barriers to bigger oligopolies in many industries, including banking.[223] It claimed market deregulations promoted competition and efficiency, whereas in reality it unleashed predatory competition, which eliminated weaker and smaller competitors through insolvencies, mergers, and acquisitions, increasing the market share of parasitic oligopolies in the US economy.[224] In addition, the counter-revolution in several Western countries privatized natural monopolies such as stock exchanges, airports, ports, and railways, as well as the progressive privatization of national health and education, resulting in far costlier services, among other negative developments.
In many sectors, oligopolies are now drawing billions of dollars through wasteful and overpriced government contracts. The US military budget exceeds the combined military spending of the next eight countries.[225] However, it is not nearly as effective as the combined forces of those countries. American agricultural oligopolies in fertilizers and seeds and wasteful federal subsidies to biofuels from corn increase the cost of food and contribute to world hunger. Big banks have increased their market shares and their operations now encompass all financial services, at significant explicit and implicit costs to the public.
Let us illustrate the social cost of uncompetitive markets with an example. American medical services are far costlier, but deliver inferior outcomes, compared to those of Japan. In 2008, US per capita healthcare costs averaged $7,437—about three times that of Japan at $2,750, yet infant mortality in the United States was about 2.7 times that of Japan.[226] This result is typical of many industries, which is symptomatic of a lack of competition and parasitic pricing.
Greed and price gouging by the US pharmaceutical industry recently triggered a public outcry, as one company attempted to hike the price of its drug, Daraprim, used by AIDS patients by 5000 percent. Hillary Clinton, a democratic presidential candidate, strongly complained about the price gouging. Soon after, on September 22, 2015, Forbes magazine published an article indicating that this extreme price hike is not unique to this drug company, providing other examples of price gouging by US pharmaceutical companies: [227]
• Fentanyl Citrate, a generic painkiller, jumped 6,500 percent between 2010 and 2015
• Doxycycline, an antibiotic, jumped 6,300 percent
• Albuterol Sulfate, an asthma drug, jumped more than 3,400 percent
• Captopril, a generic blood pressure medication, jumped 2,700 percent
These examples are dramatic demonstrations of the rise in social and private costs because of lack of competition, frequently the result of deregulation of markets and increased market concentration, mostly through mergers and acquisitions.
Like monopolies, monopsony is a means of earning parasitic profits, but on the supply side of the market equation. Monopsony is a market situation where there is a single buyer for a product or service and many sellers. It is most noticeable in the labor market. It is a market failure and negative externality for the same reason that monopoly is, except that wages are too low instead of the prices of goods too high. Lack of competition among employers permits them to underpay labor. The difference between the wages paid by monopsonists and normal competitive wages in a balanced competitive setting indicates the extent of the negative externality.
Although formal monopsony in the labor market does not exist with multiple employers hiring workers, nevertheless, capitalists, acting together, formally or informally, can exploit labor by minimizing wages, resulting in mass poverty. To realize patristic profits, most firms have no qualms about paying labor a small fraction of its marginal product. Fair wages require business and labor to have comparable bargaining powers. Even under perfect competition, never mind imperfect or oligopolistic competition, there are too few employers in relation to the number of workers. Hence, labor’s inherently weak negotiating position makes it imperative to have strong labor unions and a reasonable minimum wage for a more level playing field. Without strong labor unions, labor income will continue to deteriorate due to a weak negotiating position, immigration, and the social security tax; the latter favors the systematic displacement of labor by automation and robotics.[228] Businesses who welcome rapid and extensive automation overlook the fact that robots are not consumers.
In the 1930s, wages were meager and poverty was widespread. This prompted some Western countries to support more balanced and fairer wage negotiations by licensing trade unions. President Roosevelt’s New Deal legalized unions, but in the midst of the Great Depression, its benefit to labor was marginal. Business interests fiercely attacked unionization on economic grounds and when that failed to convince labor, it resorted to a range of illegal union-busting methods, including outright violence.[229]
Following World War II, unionization, higher wages, better working conditions, and welfare significantly curtailed labor exploitation; the rise in labor purchasing power helped bring about the business boom in the 1950s and 1960s, faster growth, and political stability.
The Thatcher-Reagan counter-revolution tweaked labor laws, undermined unions, increased immigration despite rising unemployment thereby obstructing the growth in real wages, diminished competition in the goods and services markets, and permitted the minimum wage in real terms to fall below the subsistence level. This is in contravention of what President Franklin Roosevelt wanted the minimum wage to mean, namely, a living wage. The high interest rate policy in the 1980s accentuated the chronic dollar overvaluation, thereby eroding US industrial competitiveness and the best paying labor jobs.
An example of monopsony practices is that of a giant retailer with billions in annual profits yet it only pays a minimum wage and flouts labor laws by classifying a large percentage of its work force as temporary workers to avoid paying them the benefits they are entitled to by law, without objection from the Department of Labor. This subnormal cost structure saddles local authorities with the cost of bringing the incomes of those employees to the poverty line, in effect compelling hardworking taxpayers to subsidize the operations and profits of the giant retailer. It also drives small competitors out of business for miles around its new outlets.
Moreover, game theory suggests that if large and unscrupulous employers only pay a meager wage, then even moral employers become compelled to follow suit to avoid becoming uncompetitive. Hence, unchecked immoral practices, like debasing the currency, become the norm.
The law has defined the poverty line as the minimum income necessary to cover living essentials. Hence, a minimum wage below the poverty line should be illegal because of its inhumanity; it also constitutes a drain on the public purse at a time when local, state, and federal authorities are incurring large deficits.
The official unemployment figures understate real unemployment and disregard underemployment. It excludes millions of potential job seekers who have lost all hope of finding decent-paying jobs commensurate with their skills. High unemployment has weakened labor’s negotiating position. Hence, to curtail labor exploitation, improve labor purchasing power, and limit the drain on the public purse, the federal government needs to raise the minimum wage and support unions in order to have balanced labor negotiations.
A 2013 study by the Center for Economic and Policy Research suggested that, if the minimum wage had kept pace with productivity gains, by 2013, it would have reached $21.72 per hour.[230] Such a major revision to the minimum wage would be a positive development, but it should be gradual—to permit the economy to adjust smoothly. The expected benefits include a reduction in unemployment, faster economic growth, a rise in corporate profits, a fall in crime, and a major reduction in deficits.
One argument against a higher minimum wage is that it could trigger profit-push inflation by oligopolies. The way to counter this is to increase competition by breaking up oligopolies.
Another argument presented by the media against raising the minimum wage is that it would be detrimental to small businesses. This argument is baseless because it looks at one side of the equation only, namely, the cost side. To the extent that the resultant increase in labor’s purchasing power increases the demand for products and services supplied by small businesses relative to large businesses, then on balance, small businesses will enjoy a rise in their profit; moreover, the multiplier effect would significantly increase the benefits to all businesses.
Yet another argument is that a higher minimum wage would hurt exporters and import-substituting industries. To the extent that the wages of the industrial sector engaged in exports and import substitution are more than the minimum wage then the effect of raising the minimum wage on these sectors is negligible to positive (by increasing domestic demand). Moreover, as stated previously, the main problem facing these sectors is an overvalued dollar, as evidenced by the chronic US trade deficits. Hence, reviving those sectors requires a competitive dollar exchange rate. The alternative, the present policy of reducing real wages, requires matching the labor cost in China, a futile solution that is predestined to fail. A falling dollar will inevitably entail some imported inflation, given decades of de facto import subsidies, but this side effect can be curtailed by adopting a gradual currency devaluation to give domestic producers sufficient time to expand their production to match the growing demand.
Another dimension of labor exploitation since the 1980s has been the shrinking welfare state. The relatively few enjoying high incomes and comfortable financial cushions can afford to do without the government’s provision of healthcare, unemployment benefits, pensions, education, and other welfare services. These, however, are beyond the reach of most people who receive low wages and risk periodic unemployment and austerity.
For the majority of people, the welfare state supplements the inadequacy of their incomes due to the failure of economic policy to deliver sufficient employment opportunities and a reasonable income level. For those, welfare provides some insulation against the vagaries of periodic economic shocks perpetrated by flawed economic policies. Even for those receiving a decent wage, employment is not sufficiently secure given an economy driven by financial bubbles that periodically burst, causing catastrophic job losses for the victims. Hence, for most people, dependable and comprehensive welfare benefits are critical. The market’s inability to provide a fair and secure income is a market failure perpetuated by monopsony power and inadequate and inappropriate state intervention.
The long-run harmonization of the interests of labor and capital requires a better mechanism for conflict resolution. The Germans developed a creative solution to bring the interests of labor and capital closer by offering labor a share in business profits and stock ownership, making labor an interested stakeholder. In addition to reducing conflict, profit sharing has an added advantage to business by transforming part of their fixed labor cost to a variable cost, giving them downward cost flexibility during recessions, thereby increasing business robustness and its chances of surviving sharp contractions.
A more severe consequence of monopsony is chronic underconsumption. A good indicator of strong monopsony elements in the labor market is that labor has insufficient aggregate consumption demand to induce full-employment, resulting in unemployment, underemployment, and underconsumption. Both Jean Charles Léonard de Sismondi in the early 19th century and Keynes in the 1930s viewed underconsumption as a cyclical phenomenon, a demand deficiency causing recessions and depressions.
Chronic underconsumption is a harsher version because it persists in some degree even during the recovery and expansion phases of an economic cycle, preventing an economy from ever realizing its full potential. It is an ancient problem, which Barthélemy de Laffemas identified back in 1598.[231] Numerous economists have considered chronic underconsumption since. Let us illustrate with two examples.
Chronic underconsumption represents slack in the economy and, as with cyclical contractions, the benefits derived from public expenditure, on say infrastructure, exceed the cost, hence, the existence of an externality.
Despite the significant improvement in standards of living since the mid-1940s, by the 1960s there were still indications of residual chronic underconsumption limiting economic growth. Hence, the 1964 Kennedy personal income tax cut increased disposable incomes, unleashing a sustained growth rate of 5.5 percent until 1969.
Chronic underconsumption began reappearing with the rise in monopsony power in the early 1980s. Unfavorable changes to the labor laws diminished labor’s negotiating power and expedited the fall in real wages and together with changes to the tax code, it reduced the share of labor in the gross domestic product (GDP) and increased that of the rich. This curtailed the growth in labor income, and given rich people’s low marginal propensity to consume, chronic underconsumption remerged along with slower economic growth.
Between the mid-1990s up to the Great Recession, the banks extended consumer credit to spur consumption. They also provided credit against the rise in house prices. Both proved to be temporary measures, only delaying the full onset of chronic underconsumption. Those debt-based consumption stimuli were shortsighted because indebtedness soon piled beyond labor’s income capacity to service it and the collapse in house prices ended labor’s solvency, deepening the recession in 2008.
This chronic underconsumption problem becomes more acute where fiscal authorities attempt to balance their budgets by cutting the standard of living of the working class through reducing welfare payments and increasing the direct and indirect taxation of lower income groups. It is most evident in Greece, Portugal, and Spain, with austerity producing very high rates of unemployment.
Elimination of chronic underconsumption requires increasing the purchasing power of labor by curtailing monopsony power, upgrading and expanding the infrastructure to spur employment, repealing sales taxes on essentials, and generally eliminating or lowering direct and indirect taxes on low-income groups.
Keynes made the case for a fairer income distribution as a win-win strategy. Unlike the wealthy, the poor are quick to spend the extra money they receive, and with the multiplier, the rise in their consumption has positive repercussions on the economy. Ultimately, it also benefits the rich as asset holders because as spending increases, so does capacity utilization, corporate profits, and share prices, creating a win-win outcome for all.
Accurate and timely information makes markets more efficient because it improves economic decisions with widespread benefits, making it a positive externality and vice versa.[232] Joseph Stiglitz, the economics Nobel laureate, has remarked, “I recognized that information was, in many respects, like a public good, and it was this insight that made it clear to me that it was unlikely that the private market would provide efficient resource allocations whenever information was endogenous.”[233]
Thus, an important government function is to enhance the quality and timeliness of information to improve economic efficiency. Unfortunately, today the slanting of some important economic statistics reminds us of how a failing Soviet economy routinely manipulated data to hide worsening economic problems and to exaggerate the health of the economy; denying instead of solving the problems made them incurable, making the ultimate collapse of the Soviet Union certain and swift.
The prerequisite for honest, reliable, and accurate information is morality.
Accurate and timely government reporting on economic activity permits business to fine-tune its production and investment decisions. It helps business curtail the buildup of excessive inventories earlier, thereby avoiding drastic inventory liquidations later, which cause deeper recessions. It also assists business in synchronizing its investments with the early signs of a recovery, while costs are still low, enabling briefer contractions and faster recoveries.
Unfortunately, since the 1980s, political expediency has taken precedence over economic efficiency, compelling revision of the statistical basis of economic data to improve the economic picture. Consequently, today’s statistics is less reliable because it understates inflation and unemployment rates. It has had a negative impact on economic decisions that is hard to quantify.
The present statistical definition of unemployment substantially understates the real figure. For instance, the statistics remove a specialist medical doctor from the pool of the unemployed for refusing to work as a junior general practitioner; this is grossly misleading because it pretends that a fall in unemployment has occurred. In the aftermath of the Great Recession, Professor Nouriel Roubini (b. 1958), commenting on official unemployment statistics during an interview on Bloomberg TV, estimated that the true unemployment rate was closer to 17 percent, or about double the official figure at the time. About the same time, surveys by Gallup estimated the unemployment rate at close to 20 percent.[234]
Moreover, the quality of information provided by certain quasi-government organizations is deteriorating, providing increasingly misleading and incomplete information. The most blatant example is the Federal Reserve; it has been misinforming the government and the public about the state of the economy and the true amount of credit it has extended to various parties.[235]
More fundamentally, national income statistics should be conceptual, instead of mechanical as they have been since their inception. It is economically irrational to treat repairing the effects of negative externalities as a positive contribution to national income (NI), as though a normal economic activity. For example, the cost of maintaining a huge prison population, the environmental cleanup following a major oil spill, and engaging in wars of aggression all entail huge negative externalities and therefore should not be presented as positive contributions to national income. In other words, it is statistically misleading to claim that the economy is better off after jailing someone than it was before a crime was committed, or the environment is better after a cleanup than it was before an oil spill occurred, or starting a war of aggression is better than maintaining peace. Clearly, such expenditures represent the cost of negative externalities, which is distinctly different from expenditures that raise the standard of living and improve the quality of life such as improving infrastructure, education, and social services, or buying a new car. More plainly, it is misleading to pretend that the breaking of a window and its subsequent repair is equivalent to installing a new window in a new building, which is what current statistics claim.
Thus, national income statisticians ought to separate the cost of handling negative externalities from the figures that make up national income. They should not presume that the repairs of car accidents are the same as the manufacture and purchase of new cars. Fine-tuning the statistical definition of national income is likely to induce politicians to adopt rational economic choices that improve real economic performance and the well-being of the population, instead of policies that simply bloat negative externalities, such as extending jail sentencing or waging wars of aggression.
Credit-rating agencies are in a bind. Corporate borrowers, to minimize their borrowing costs, shop around for the credit agency that offers them the highest credit rating. The rating agencies need to please their clients, the borrowers, and simultaneously offer accurate credit assessments to bond investors. This irreconcilable conflict of interest requires that credit agencies accomplish an impossible feat, yet another demonstration of usurious capitalism at work.
The problem begins with the term credit-rating agency, a misnomer. These agencies are, in essence, public relations firms specializing in credit promotion and they should be labelled accordingly.
Aside from credit agencies’ built-in bias to overrate credits, their methodology is flawed. Their credit-rating process does not assess a borrower’s ability to remain solvent until the full discharge of the debt. A more meaningful credit-rating model would consider the incremental financial stress on a borrower due to the combined effect and timing of potential recessions, concentrations of debt principal repayments, expiration of profitable contracts, loss of competitiveness, and the financing of plant replacements or expansions, among others.[236] This lack of a sensible and formal credit standard has given rating agencies undue flexibility with their ratings, permitting them to elevate junk debt to AAA, which deepened the 2008 crisis. Still, without resolving the inherent conflict of interest, the problem is bound to reemerge, with the fading of the memory of recent misdeeds. Amazingly, the ownership of those credit agencies did not pass to the investors to compensate them for their huge losses resulting from flagrantly poor-quality ratings.
The strong adherents of the efficient market hypothesis (EMH) claim that stock prices reflect all available information and, therefore, obtaining additional information and conducting stock research provides no incremental benefit to investors. On the other hand, common sense suggests that improving corporate reporting standards and providing better analysis of corporate performance is essential for improving capital market efficiency. Regrettably, the skirting of common sense in the EMH culture has encouraged a lack of concern for the quality of corporate information. Moreover, the deterioration in moral business standards, a growing negative externality, has induced a parallel decline in corporate disclosure standards, as the following makes clear.
Enron, a blue chip company with $101 billion in reported revenues, was the darling of the financial media, until it disappeared like a puff of smoke in 2001. The prestigious Fortune magazine hailed it as America’s most innovative company for six years in a row.[237] Enron’s bankruptcy was the largest in history; it surprised investors, despite months of insider selling, which plunged the stock from more than $90 a share to pennies.[238] It must have startled the chairman of the Federal Reserve, Alan Greenspan, too because he accepted an Enron prize barely nineteen days before it folded.
Like most financial disasters, Enron’s collapse was the result of multiple failures. Foremost, it was a colossal moral failure, starting with its management and auditors. Enron’s management—supported by its public auditors, Arthur Andersen—ventured beyond creative accounting. The accounting charade began in the 1990s, using offshore entities to report billions in illusionary profits and conceal losses, obligations, and debts. Its accounting standards were scandalous. The Enron debacle signaled a still wider professional failure; investment bankers, advisors, funds, and the financial media did not disseminate accurate advice about the company. It was also a supervisory failure because the Securities and Exchange Commission (SEC) did not spot the major discrepancies in the profit figures that Enron was reporting to its shareholders, the SEC, and the tax authorities.[239]
Enron was not an obscure little company. Hence, its sudden disappearance demonstrated the gross inefficiency of capital markets and, therefore, the fundamental fallacy of the modern portfolio theory and the efficient market hypothesis, which encouraged laxity. Indeed, deteriorating accounting standards greatly increased the inefficiency of capital markets but the efficient market hypothesis theorists hardly noticed, perhaps because it invalidated their theory.
In 1998, Business Week surveyed 160 chief financial officers; 55 percent indicated that their colleagues had at least suggested cooking the books, while another 12 percent admitted to yielding to such requests. Between 1997 and 2002, approximately 1,000 enterprises were compelled to admit that their reported earnings were not correct.[240]
In 1998, SEC Commissioner Arthur Levitt delivered a blunt speech to the corporate sector, “In the zeal to satisfy consensus earnings estimates and project a smooth earnings path, wishful thinking may be winning the day over faithful representation. The fear is there is a progressive erosion of the quality of financial reporting and, consequently, the quality of reported earnings, as management gives way to manipulation.”
In 2001, the Jerome Levy Forecasting Center published an alarming report on S&P 500 earnings titled “Two Decades of Overstated Corporate Earnings: The Surprisingly Large Exaggeration of Aggregate Profit.” The report identified a systemic problem that was eroding the stock market’s efficiency. It reported that in two decades, earnings exaggerations, using creative accounting, doubled from about 10 percent to 20 percent, if not more. Manipulating corporate earnings consisted of understating costs for several years followed by taking a one-time extraordinary write-off as an exceptional, non-operating, expense. The accounting profession has enabled such manipulations by decreeing that those exceptional costs are not regular expenses, which they were, but their occurrence is irregular or their recognition has been delayed. S&P expected these irregularities to constitute 38 percent of earnings by 2004.
Gail Dudack, chief market strategist at SunGard at the time, also observed that, until the mid-1980s, extraordinary items represented a tiny percentage of S&P earnings. Remarkably, the rise in overstated earnings coincided with the gathering pace of the Thatcher-Reagan counter-revolution.
These hefty manipulations have rendered corporate reporting misleading, thereby reducing market efficiency. Accounting standards must stop facilitating the massaging of earnings. The investing public needs a separate supervisory body to rein in fictitious accounting.
Public corporations should be required to replace their auditors every two years, without rehiring past auditors for twenty years, and large corporations need to have two auditors at a time. This will effectively break up the present auditing oligopoly, broaden the choice of auditors, cut the inflated auditing fees, and improve accounting standards and market efficiency. Increasing competition among auditing firms and more frequent loss of licenses for lax senior auditors are necessary to discourage violations and improve the standards of practice. The incremental cost of an additional auditor is marginal, given more competitive pricing; in return, it will improve market efficiency and save investors billions in potential fraud.
As moral restraint has waned, the incidence of abuse has multiplied, making government supervision the last hope of retaining a reasonable degree of reliable information, compliance, and fairness. This required increasing the budgets of watchdogs, but the lobbyists constrained those budgets, thereby undercutting market efficiency.
In March 2009, Bernie (Bernard) Madoff, a former nonexecutive chair of NASDAQ, pleaded guilty to 11 federal felonies. He admitted to defrauding thousands of investors and that his asset management business had been a Ponzi scheme since the early 1990s, although some analysts suspect it had been a fraud since the 1970s. The market crash of 2008 prompted many of his clients to withdraw their money, unraveling the largest financial fraud in US history, with almost $65 billion missing from clients’ accounts.
No one detected Madoff’s glaring fraud for decades, casting doubt on the reliability of auditors, the SEC, and investment managers generally. Oddly, the SEC had investigated Madoff’s operations in 2003, but did not spot the swindle. Madoff later commented, “They never even looked at my stock records. If investigators had checked with the Depository Trust Company…it would have been easy for them to see.”[241]
The SEC and its apologists attribute decades of gross negligence to insufficient budgets. However, insufficient budgets are not a blanket excuse for all wrongdoings. True, the auditor did not report any fraud, but why did the SEC—given the size of Madoff’s operations—not require two auditors with a maximum term of two years each, without rehiring of past auditors for twenty years, to minimize the odds of complicity? This would have improved the odds of an early detection of fraud at no cost to the SEC, thereby saving investors billions. More worrisome, even with the benefit of hindsight, there is still no such requirement.
The SEC’s line of defense is feeble, validating the saying: There is always a good reason for doing the wrong thing. If Madoff’s Ponzi scheme could fool investors for decades, how many more undetected Ponzi schemes are out there? Most puzzling, the SEC could neither recover, nor trace the billions that Madoff looted. Perhaps it is high time that public servants became personally liable when they are chronically negligent.
When economists act as hired pens for lobbyists instead of retaining independent opinions, it spells a moral and professional failure. Another disturbing problem arises when economists in the employment of government advise it and Congress to adopt economic policies that favor their past or future employers in a variety of industries, particularly banking. These conflicts of interest have damaged the credibility of the economics profession.
To improve the independence and objectivity of economists, the profession should adopt a code of ethical conduct that requires economists to declare who has paid for their opinions, how much, and what they have been promised in future employment and otherwise. They should also satisfactorily explain why they are willing to leave their high-paying posts in the private sector for the much smaller salaries offered by the government. Various observers have also called for a long cooling-off period between employment in government and a return to the private sector, so as to curb revolving-door employment between government and business.